Stock Returns and Inflation in Norway

Abstract

We study the nexus between equity returns and inflation on Norwegian data, and test the explanatory power of the two most prevailing theories; the inflation illusion and the FED model. In addition, we test if the inflation-target policy introduced in 2001 has had an impact on this relationship. We segregate the dividend yield into three components and these components are used as dependent variables in a regression analysis during three time-periods. We find that inflation has a significant, but unstable relationship with the different components and that a significant break in the model in 2001 exists. We conclude that it is premature to assume a causal link between both the equity return-inflation relationship and that the change in this relationship can be related to the inflation-target introduction.